As a country aspiring to become a global energy superpower, Canada must take a lead in mitigating the negative impact of greenhouse gas emissions on the economy and the environment, if only to ensure access to markets where public concern over climate change might raise challenges. One way to do so is by placing a cost on carbon.

Many economists agree that a formal carbon pricing policy is the best way to reduce carbon dioxide pollution. Compelling producers of carbon emissions to account for the cost implications of pollution produced in the manufacture and use of their products gives them an incentive to invest in cleaner ways of doing business. At the same time, increasing product prices that include the cost of carbon will encourage consumers to cut down on energy use and reduce spending on energy-intensive goods. In that way, consumer demand for, and corporate supply of, low- carbon goods and services meet up to create new economic activity. That’s the way markets are supposed to work.

While some people argue that carbon pricing will stifle the economy and raise the cost of living, the more prevalent view is that doing nothing to address climate change caused by carbon dioxide emissions is by far the most expensive and damaging option.

The debate over carbon pricing in Canada is not new. Some jurisdictions have forged ahead and implemented their own formal policies. For example, Alberta and British Columbia fix carbon prices at a set rate while Quebec’s incoming cap-and-trade system is part of the Western Climate Initiative and is linked to California’s system. Other jurisdictions are still considering carbon pricing legislation, but it’s unclear what it will look like. At the federal level, the regulations being created to limit emissions in various sectors effectively translate into a carbon price that might not be apparent, but is just as real and far less efficient because the cost is not transparent to the market.

This hodgepodge approach is not good for companies operating in Canada because it provides only limited policy certainty and leaves them guessing about future policies in jurisdictions that are still unsure of how to deal with carbon pricing. Policy certainty, particularly on issues with significant financial implications is crucial to the success of industry sectors and the economy as a whole. A new survey by Sustainable Prosperity conducted among 10 major energy companies operating in Canada shows that most already use a “shadow” carbon price to prepare for the expansion of carbon pricing. Shadow carbon pricing, generally expressed in terms of dollars per tonne of CO2 or carbon dioxide equivalent (CO2e), is the voluntary use of a notional market price for carbon in internal corporate financial analysis and decision-making processes.

Some companies see shadow carbon pricing as a way to drive performance through operational efficiency and profit maximization and create opportunities for technological innovation and market access.

The 10 companies surveyed — BP, Shell, Suncor, Statoil, Devon, Cenovus, Penn West, Enbridge, Ontario Power Generation and SaskPower — all have some experience in using shadow carbon pricing; seven formally and three informally. Using a shadow carbon price appears to have become an industry standard for the oil and gas sector.

Among the seven companies that formally use a shadow carbon price, the price, Canadian dollars, ranged from $15/tonne to $68/tonne. The top of the range represents a price projection for future years: $48 – $68/tonne for 2020 and up to 2040.

What this suggests is that major companies in the Canadian energy sector are prepared for carbon pricing.

With the cost of carbon already largely “internalized” in their forward-looking planning and operations, it may be fair to assume that the creation of a carbon price at the national level would not catch the energy sector unprepared.

A national policy is important because, while laudable, corporate leadership in the use of a shadow carbon price is no substitute for the policy certainty of a regulated market price for carbon that levels the playing field between companies, engages consumers and establishes pricing levels commensurate with the attainment of Canada’s national obligations.

Furthermore, while many companies are integrating carbon pricing into their business processes and testing the economics of their projects for a range of prices, there is little indication that shadow carbon pricing is being used to manage the risk of more significant carbon abatement costs in the future.

This shows clearly that company action cannot be expected to substitute for government policy on this crucial issue.

As long as shadow carbon prices are voluntarily applied and not regulated there is unlikely to be an impact on consumer prices. Without that transparency, one of the chief advantages of a pricing instrument — its ability to influence the behaviour and choices of companies and consumers — is muted.

Alex Wood is senior director of policy and markets at Sustainable Prosperity and Tyler Elm is chairman of the Canadian Chamber of Commerce’s energy and environment committee.

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